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Home Publications Blogs Beat the Press Ezra Klein: Out of the Ballpark on Inside Job

Ezra Klein: Out of the Ballpark on Inside Job

Wednesday, 22 June 2011 21:05

I always enjoy reading Ezra Klein’s blog. He’s an excellent writer and he does his homework. However, he really missed the story in his review of Inside Job  (even though I do appreciate the favorable mention).

Ezra criticizes the movie for making the story one of corrupt economists blessing the evil doers of Wall Street:

“What’s remarkable about the financial crisis isn’t just how many people got it wrong, but how many people who got it wrong had an incentive to get it right. Journalists. Hedge funds. Independent investors. Academics. Regulators. Even traders, many of whom had most of their money tied up in their soon-to-be-worthless firms.”

This is the right point, but I think Ezra takes it in the wrong direction. Certainly all of these people were not on the take in the same way as some of the film’s heroes (i.e. former Federal Reserve Board Governor Frederick Mishkin who got paid six figures to write a report praising Iceland to the sky in 2006). However, it does not follow that they had incentive to “get it right.”

Getting it right meant that you had to say that the honchos were wrong. You had to say that Martin Feldstein, Gregory Mankiw,  Larry Summers, Alan Blinder, Ben Bernanke, and the Maestro, Alan Greenspan, were missing the largest asset bubble in the history of the world right in front of their eyes.

This would really put you on the firing line if you were an economist at the Fed, the IMF, or even an academic economist hoping to advance in the field. After all, you could be wrong, in which case you might as well spend the rest of your working career wearing a tin foil hat.

On the other hand, what is the cost of going along? It turns out that economists are a remarkably forgiving lot – not in respect to workers in workers in the United States or retirees in Greece – but certainly when it comes to each other. The mantra “who could have known?” has provided a pretty much blanket amnesty. Next to no one got fired and very few people even missed a scheduled promotion for missing the housing bubble; the collapse of which may wreck the economy for a decade. In fact, even Daniel Mudd and Richard Fuld, the men who bankrupted Fannie Mae and Lehman respectively, have both found their way back into very high-paying jobs in finance.

In short, there is a serious problem here of asymmetric  risk. There is no doubt that saying there was a bubble posed serious dangers to the careers of those who stepped outside of the consensus established by the top thinkers in the profession. However, just going along with the mainstream view carried no risk whatsoever. There is no reason to believe that anything about this story has changed in the years since the crisis.

Perhaps Inside Job can be blamed for not fully exploring the subtleties of this process, but it was a movie, not a book, and there is a need to be entertaining as well as informative. So, I can agree that the movie did not fully explain the dynamics that allowed for such a dangerous bubble to grow right under the nose of so many intelligent people, but I think it still got the essentials of the story right.

Like Ezra, I qualify as a nerd. But the movie was not intended to provide the full story to the discerning nerd. It was intended to give the essentials to the masses, and on this score I give it high marks.

Comments (13)Add Comment
written by Walter_R, June 22, 2011 9:40
Keynes once said, and I paraphrase, that success for a banker doesn't mean avoiding ruin, but rather to make sure that when he is ruined, he is ruined in the same way as his fellow bankers.

The same can be said of economists, changing 'ruined' to 'wrong'.
written by Adam, June 22, 2011 10:25
When I read this post from Ezra earlier, I had a strong hunch you would comment on it. Glad to see my speculation validated. I enjoyed the movie and as someone who is a psychology graduate, not an economist, we need things like inside job to help us better understand what is happening. As you mention in other posts criticizing journalist (and rightfully so), I have a full time day job and so I cannot sort all this out. Though I, too, qualify as a nerd (psychology, religion, and healthcare) it is impossible for me to know it all, as much as I protest that fact.
written by S. D. Jeffries, June 22, 2011 10:57
Our politicians, and of course journalists, suffer from the same disease as the economists featured in "Inside Job" - that is, the "Go Along to Get Ahead" disease, otherwise known as mob mentality. And politicians, as well as journalists, can and do cause enormous difficulties for everyone else when they contract, and then succumb, to this disease. Worse, the disease is contagious, particularly striking those who already suffer with small minds, closed minds and overactive self-righteousness - in other words, compromised immune systems.
written by Ben H, June 23, 2011 3:32
The problem is in the word `corrupt' as used by Ezra. There's an American tendency to focus on people not systems, so by `corrupt' what's understood is an individual who acts in a way that's illegal or that people feel ought to be -- eg Mishkin in the film.
So you have the highly entertaining Michael Lewis version where you have the smart guys on one side of the trade who get it, and the stupid guys on the other side who don't. And it's the latter who are the problem -- not the existence of the trade itself, which implicates both sides.
For a system to be corrupt means something different than that many people within it have individual moral flaws, though no doubt they do.
Whose interest? Which "incentive"?
written by Reverend Lee, June 23, 2011 4:42
Exactly, Dean. It does not follow that a threat to the rest of society is a threat to your career. And the wisdom of the conventional is that you look after your own career and let everything else sort itself out. Besides, there was nothing to worry about anyway, because so many experts, so many smart people, couldn't be so wrong--almost by definition.
written by Jim, June 23, 2011 6:10
Case in point. I didn't see the movie, but I understand that it mentioned Brooksley Born, a highly placed government official who bucked the "big boys" when she pointed out the dangers of the developing derivatives market. Look what happened to her, and she was right.
Crowds of Wisdom
written by izzatzo, June 23, 2011 6:18
However, it does not follow that they had incentive to “get it right.”

Getting it right meant that you had to say that the honchos were wrong.

Any economist understands that under the wisdom of crowds theory correct answers eventually emerge due to the intense competition that prevents a few players from influencing the outcome.

Blaming 'honchos' for the outcome is like blaming Bernie Madoff for the bubble that he could not possibly have influenced on his own.

Everyone knew there was a bubble caused by government interference with the free market but as standard game theory predicts no one complained because they all benefitted.

Stupid liberals.
written by skeptonomist, June 23, 2011 8:11
Dean is right that there was little incentive for anyone in authority to buck the herd. But it is human nature to go along with the herd - otherwise there would probably not be asset bubbles. It's no good asking for better Fed chairmen who are not members of the herd, and certainly it is counterproductive to insist that the Fed does have or should have the discretionary tools to control the economy when it has been shown repeatedly that human beings are not capable of this kind of control. What is needed is automatic controls and limitations - you can't expect the Fed to step in and curtail dangerous activities in CDS's (say), they must be prohibited or limited to begin with. The New Deal actually got this principle right, but erosion of limitations and regulations is perhaps the main thing which has changed to bring about control of the economy by the financial industries. Reliance on the Fed for discretionary regulation and post-facto action to counter recession is a major part of this erosion.
Penn Square/Silverado S&L redux
written by bg, June 23, 2011 8:53
After reading Ezra, I directed him to the prototype of this "complicated" mess.

What's complicated about updating an old scam model?
Nobody DIDN'T see it coming....
written by Mike Dillon, June 23, 2011 11:23
I'd be interested to see what ended up on the cutting room floor on "Inside Job". Of course, in this day and age, it's the Recycle Bin on the desktop. Only so much you can get into in a mainstream movie before you start getting TOO wonkish and nodding off your audience...

I believe the phrase that you're looking for is "Hoocoodanode". RIP Tanta http://hoocoodanode.org/node/12609
Dean & Ezra Are Both Wrong
written by AJ Oliver, June 23, 2011 12:30
Not to offend, but it wasn't just a "bubble" requiring better analysis. It was massive, systematic and deliberate fraud from top to bottom, inside and out. Read "Griftopia" (flawed, but still good), or "Broke USA".
written by Fred List, June 23, 2011 5:37
The same dynamics block informed discussion of trade. There are huge downside risks to criticizing "free trade" policies and no cost whatsoever to going along with the orthodoxy on globalization.
The Criminal Mind
written by Edward Ericson jr., June 23, 2011 8:50
considers itself only: what's in it for me? Right Now? It is incapable of anticipating future results of present actions, or of seeing any benefit to supporting the larger society. In real life, these limitations are why so many criminals are so easily caught. But in Finance Land, the criminal mind is a prerequisite not to success, but to survival. This is the message of Inside Job. It is true and profound.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.